Monday, November 26, 2007

Virgin On The Ridiculous?

Although... is this by any chance the same Sir Richard pictured on the cover of The City Book of Very Sharp Operators?

Hmm.

According to today's Update on Strategic Review put out by NR, taxpayers will remain committed even after Virgin takes over. True, Virgin will repay £11bn of the Bank of England loan immediately, but that will still leave £13bn plus outstanding. And we will rank no higher than the commercial banks backing Branson (who may very well be on other sweeteners to ease a troubled mind).

How quickly will we get the rest back? And what happens if the bank gets into difficulties again? What happens in a world of falling property prices? And what happens if it can't attract new deposits without that Bank of England guarantee?

That second point could be very important. As we've declared previously, rate tart Mrs T currently has a Silver Saver instant access account because it pays a market leading 6.3% and is fully guaranteed by HMG.

But we know- because Tyler looks into these things- that unsecuredCrock debt is currently junk. Specifically, its credit rating for senior debt without the HMG guarantee is BB, a junk bond rating.

Now there are all kinds of reasons why you might want to invest in junk bonds, but only if you get paid for taking the risk. As we've blogged before, bank deposits are unsecured senior debt, and 6.3% is most definitely not being paid to take the risk (cf this sleep-at-night Halifax account on 6.25% ).

So as soon as the HMG guarantee goes, so does Mrs T's deposit. Along with a whole load of others, no doubt.

Of course, Virgin and their backers are aware of this risk. They are going to inject some new capital. The NR Update says it will be £1.3bn, plus the £250m current value of Virgin Money, which will be folded in. Call it £1.5bn, of which £650m will be raised via an issue of new shares at 25p each. Acccording to the Update:

"The Virgin Consortium expects that the Company will quickly re-build a deposit base to drive a more sustainable funding structure and is targeting a credit rating of no less than 'A'."

Single A? Halifax (HBOS) is a strong AA, much more comforting. Why would Mrs T leave her money with a Branson owned, single A targeting, recovering Crock, when she could get virtually the same interest rate from Halifax?

That's right- she wouldn't.

Our guess is that Virgin will find it difficult to rebuild the deposit base. Unless of course, it offers some pretty racey rates. But that undermines profitability, which is not at all what Branson and his backers will have in mind.

So how long before we get the money back? The Update says virtually nothing:

"£11 billion will be repaid to the Bank of England at completion of the transaction - and the Bank of England will have a clear path towards repayment in full."

The reality is that the clear path will meander on for many years. Meanwhile taxpayers will continue to underwrite the enterprise with an open-ended loan commitment. And under the Virgin plan, our loan will be atmarket rates, not even the penal rates charged up until now.

Good luck to Branson- he's certainly got cojones.

But we taxpayers should not presume the pain is over.

Not by a long chalk.

Update: NR's share price is up 30%. Clearly all those City spivs like the sound of that open-ended taxpayer funding. And also, in a highly unusual step, Branson's reportedly putting in £200m of his own money. It's clearly much worse than even we thought.

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